Economy Watch: CA Real Estate Execs More Optimistic About Industry

A strong belief that recent tax reform will benefit commercial real estate has encouraged many market participants to feel more optimistic about the industry's future than they did six months ago, according to the latest Allen Matkins/UCLA Anderson survey.

Commercial real estate executives in the bellwether markets of California are a lot more optimistic now, at the beginning of 2018, than they were only six months ago. That’s according to the Winter/Spring 2018 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, which was released Jan. 31. The change mostly reflects the strong belief that the recent federal tax overhaul will be very good for CRE markets.

The logic is simple enough: The tax bill is expected to increase the rate of return on commercial real estate and thus makes investment more attractive. Survey participants predict it will cause moderate though uneven growth.

“We saw a bump-up generally in most of the markets and most of the product types,” said John M. Tipton, operating partner of the Century City office of Allen Matkins. “In our June 2017 survey, sentiment had settled. The idea was that real estate had had a long run, and it naturally was going to slow down.”

Now, however, the survey respondents are more bullish. “Some of that is attributable to the tax cut itself, but it’s also because the bill had some very favorable provisions for commercial real estate,” Tipton explained.

Office, Industrial Markets Stronger

The latest survey, taken in December, showed improved office developer sentiment for each of the Northern California office markets and marked the first time since June 2015 that all three markets—San Francisco, East Bay and Silicon Valley—have been at least at the dividing line between optimism and pessimism.

Similarly, the sentiment for San Diego and Orange County markets has also rebounded from the June 2017 survey, implying the expectation that future rental rates and vacancy rates will be better than now. The Los Angeles market, which did not previously see a decline in sentiment, continues to enjoy optimistic sentiment, thanks to the entertainment and tech sectors.

In the industrial market, despite last June’s panel seeing the Bay Area as being at its peak, events since then led the panelists to conclude that there will not be enough industrial space in three years, and that today’s high occupancy rates will hold or continue to rise.

The industrial outlook for Southern California is for a moderate increase in new industrial projects relative to a year ago, the survey found. This is likely caused by the large increase in imports from Asia, as well as indicators that the economy is still growing.

Pessimism Remains for Retail, Multifamily Sentiment Unchanged

Though the tax overhaul was supposed to spur higher returns of investment throughout commercial real estate sectors, that does not seem to be the case in retail development. In fact, the respondents in each of the six California regions surveyed are more pessimistic now than they were before the tax bill passed.

Though there were reports of a strong holiday buying season for brick-and-mortar retail establishments in 2017, e-commerce and online retail business led by Amazon Prime is growing at a much higher rate. This trend continues to cause the closing of many California stores, including retailers like Sears, Kmart, Walmart, Kitson and Macy’s, despite the fact that the economy continues to expand.

There has been no significant change in multifamily developer expectations since last June’s survey, according to Allen Matkins. But unlike retail, multifamily is performing well for investors. Consequently, permits for new units rose by 12.8 percent from the previous year.

Developer activity falls in line with this outlook. In both the Bay Area and Southern California, many more developers have plans to start new projects this year than last year. Vacancy rates throughout Southern California are expected to remain the same or slightly increase throughout the rest of the decade.